Does deposit insurance matter if your bank can’t fail?

By  Ebrima Santos Sanneh

WASHINGTON — Most companies don’t expect their main banking partner to fail — indeed, before this month, none had failed since 2020. So rather than depositing their money into the safest possible accounts, many firms have instead prioritized interest rate returns and convenience over reducing deposit risk. Greyson Tuck, president of consulting firm Gerrish Smith Tuck, says Silicon Valley Bank’s tech customers and their financial officers would rather hold large amounts of cash uninsured than manage hundreds of accounts in the name of absolute FDIC insurance coverage…..Karen Petrou, managing partner at Federal Financial Analytics, says another reason Silicon Valley had so many uninsured deposits was the way they allegedly enforced exclusive banking partnerships with companies seeking loans. If that was the case, she said, it means whole networks of tech companies and their affiliates had all their eggs in one basket. “SVB appears to have mandated ‘exclusivity’ clauses requiring any venture capital firm that received funding from the bank not only to deposit proceeds with the bank, but also require by covenant that any entity in which the VC invested do the same,” said Petrou. “It is for this reason that so many small tech and biomed firms had such large deposits at SVB, including  payroll.” Petrou said that if subsequent investigations confirm that SVB relied on exclusivity clauses for its startup clients, regulators should immediately prohibit such clauses as preconditions for banking relationships. “If it turns out that these exclusivity clauses existed as firms tell me they did, then this practice needs to be sanctioned as soon as possible so no other depositor is ever put at this kind of risk ever again,”  Petrou said….